Tuesday, July 22, 2014

FCC Should Finally Grant CenturyLink Forbearance on Broadband Enterprise Services


Amidst overseeing the transition from legacy telephone services to all-IP networks, why would the FCC put competitive broadband services back under legacy telephone regulations? Or rather, why would it single out one provider of broadband services for legacy regulations? Regrettably, that’s exactly what the FCC is doing when it comes to CenturyLink’s broadband enterprise services.

Just this month the FCC took public comments on a proposal to keep those services under the thumb of last-century telephone regulations. But forward-looking communications policy should reflect technological advancements and competitive market realities. And just administration of those policies should scrupulously avoid disparate treatment of market participants. The FCC’s proposal fails on both accounts.  



The enterprise broadband market is highly competitive. There are no dominant carriers. CenturyLink’s rivals have long since been granted forbearance from dominant carrier rate regulations and Computer Inquiry tariff requirements. Straightforward application of FCC precedents calls for forbearance relief from dominant carrier regulations for CenturyLink. At long last, the FCC should grant CenturyLink forbearance from those outdated regulations, and stop singling it out for disfavored regulatory status.

Enterprise broadband services offer high data speed and capacity capabilities through Ethernet and other IP-enabled technologies. Such services are highly sought after by enterprise customers with unique communications and information technology needs. Enterprise broadband customers are typically sophisticated and informed, soliciting customized offerings and bargaining with providers. Nationwide, the broadband enterprise services market has numerous competing providers, including AT&T, Cox, Charter, Frontier, Verizon, Comcast, and Level 3.

Through its Enterprise Broadband Orders (2006-08) the FCC expressly concluded that the market for packet-switched broadband services was "highly competitive." The FCC likewise recognized that the demand for such services is sufficient to incentivize deployment and entry by competitors absent such regulation. The Enterprise Broadband Orders granted Section 10 forbearance relief to several incumbent local exchange carriers (ILECs), including AT&T, Embarq, Qwest, and Verizon.

The U.S. Court of Appeals for the District of Columbia Circuit expressly upheld the FCC's analytical approach and granting of forbearance relief in Ad Hoc Telecommunications v. FCC (2009). As the D.C. Circuit wrote: "Perhaps an obvious point, but a decision that gives owners of telecommunications lines more control over access to those lines tends to increase the incentive for competitors to build competing lines."

Inexplicably, some of CenturyLink's Ethernet and other broadband enterprise offerings are still subject to dominant carrier and Computer Inquiry tariff obligations. Those regulations are a vestige of last-century copper-based local telephone monopoly conditions. Subjection to dominant carrier regulations hampers Century Link’s ability to offer nationwide flat-rate pricing options to potential enterprise customers. Corresponding tariff obligations require CenturyLink to give its competitors advance notice of its price offerings. This gives competitors a jump in luring away potential enterprise customers.

With CenturyLink’s marketplace rivals operating free from dominant carrier constraints, the regulatory disparity is obvious. For that matter, the FCC’s disparate treatment of CenturyLink’s broadband enterprise services constitutes an administrative form of unequal treatment under the law. Court precedents applying the Administrative Procedures Act's "arbitrary and capricious" standard hold that federal agencies cannot treat like cases differently. The same criteria must be applied in an equal manner to all parties petitioning for regulatory exemptions.
Disconcertingly, the FCC has taken public comments on its proposal to change the rules on CenturyLink. In particular, the FCC has proposed to jettison its dynamic, forward-looking analytical framework from its Broadband Enterprise Orders. Instead, the FCC would subject CenturyLink’s petition to the same type of telephone monopoly-style framework set out in the Qwest Phoenix MSA Order (2010). The FCC plans on issuing an additional data collection request to coincide with its new approach to enterprise broadband services.

By over-relying on static market indicators, narrow market definitions, and misconceptions regarding pricing in networked services that are highly regulated, Qwest Phoenix MSA Order imposed unjustifiably high hurdles to forbearance relief. Acknowledging it offered no quantitative analysis, the Order stacked the deck against forbearance relief by adopting a burden-shifting analytical framework. That is, the Order demanded forbearance petitioners put forth evidence conclusively proving a negative; namely, that they did not exercise market power sufficient to keep prices above what the Commission deemed competitive levels. In that instance, the Order ignored petitioner Qwest’s steep losses in market share to rivals and excluded any competitive effects from wireless alternatives.

Significantly, the FCC now appears set to disregard the fact that the Qwest Phoenix MSA Order's framework applied specifically to legacy voice services, not to broadband services. According to paragraph 39 of the Order:
Indeed, a different analysis may apply when the Commission addresses advanced services, like broadband services, instead of a petition addressing legacy facilities, such as Qwest’s petition in this proceeding. For advanced services, not only must we take into consideration the direction of section 706, but we must take into consideration that this newer market continues to evolve and develop in the absence of Title II regulation.
Whatever the Qwest Phoenix MSA Order's shortcomings, the FCC had good reason for recognizing regulatory distinction between legacy voice services and broadband services. The D.C. Circuit wrote in Ad Hoc Telecommunications: "Broadband services do not correspond to the old telephone-cable regulatory divide," and credited both Congress and the FCC for recognizing that "regulation of broadband can pose different issues and challenges than regulation of local telephony."

The Broadband Enterprise Orders recognized that forbearing from these regulations incentivizes additional investment in broadband infrastructure and enhances competition in the broadband enterprise services market. Those precedents better reflects technological advances of the last decade and today’s marketplace realities. Legacy telephone regulations are ill-suited to advanced information technologies in dynamic markets. For such markets, the burden should be on the regulators or pro-regulation parties to offer evidence of market power and likely consumer harm before government imposes restrictions.

Since the Enterprise Broadband Orders, those services have been further deployed and the market has become even more competitive. There is no evidence that CenturyLink has market power. Discarding agency precedents set in its Enterprise Broadband Orders and continuing to single out CenturyLink for disparate treatment would be the epitomize arbitrariness and capriciousness.

Friday, July 18, 2014

Sen. Thune, Commissioner Pai Urge Tax Moratorium Adoption

Yesterday, in a blog in this space, FSF's Michael Horney urged the Senate to follow the House of Representative's lead and promptly pass the Permanent Internet Tax Freedom Act ("PITFA"). The current moratorium on taxing Internet access services expires on November 1, so quick action is needed to prevent the imposition of new taxes.

As a follow-on, please see the op-ed in todays' Wall Street Journal [subscription required] by Senator John Thune and FCC Commissioner Ajit Pai urging the Senate to act promptly.

By the way, the Senate bill, with broad bipartisan support, already has 52 co-sponsors.

There is no reason why the Tax Freedom Act shouldn't be sent to President Obama for his signature before the next Congressional break.  

Thursday, July 17, 2014

The Senate Should Pass the Internet Tax Freedom Forever Act Now

The Permanent Internet Tax Freedom Act (HR 3086), which would permanently ban state and local taxes on Internet access, passed the House of Representatives on Tuesday.  It is now the Senate’s turn to pass the Internet Tax Freedom Forever Act, and it should do so well before the current tax moratorium expires on November 1st.
Senator John Thune (R-SD), a lead sponsor of the legislation, applauded the House for its passage of the Act, adding that “it’s time for Leader Reid to take up this bipartisan bill to ensure we continue to keep the Internet accessible to consumers across the country and encourage innovation and investment in our global economy.”  If the legislation does not pass and the moratorium expires, taxes levied on Internet Service Providers would raise the price of broadband for consumers.
Taxes imposed on any good or service raise the price, resulting in a decrease in the quantity demanded from consumers.  Whether taxes are shifted on consumers or businesses, the elasticity of demand and supply allows for both sides of the market to inherit the burden, ultimately leading to less economic activity and growth.
While all taxes are regressive in one way or another because the marginal value of a dollar is much higher the fewer dollars someone has, taxes on Internet access would be especially regressive because it is often the poorest people that do not adopt Internet in the first place.  A tax on Internet access could push the price of broadband beyond many of the poorest consumers’ willingness to pay.  Even if a person had not adopted prior to the tax being levied, the increase in price would make them less likely to adopt.  Allowing for a barrier to connecting the poorest citizens to the Internet seems counterproductive to ending the “digital divide.”
It is very important that the Senate quickly pass the Internet Tax Freedom Forever Act, so the economy can continue to see innovation and growth within the Internet.

Monday, July 14, 2014

A Bipartisan Capitol Hill Effort That Could Pry Spectrum Out of Government Hands and Improve Consumer Welfare



by Gregory J. Vogt

In the midst of all the political wrangling in Washington, sometimes there is a breath of fresh air: new bipartisan spectrum policy proposals seek to allocate more spectrum for commercial mobile broadband use, which encourages private investment, grows the economy, and meets customer demands, all of which substantially improve consumer welfare. Senator Marco Rubio (R), together with some support from Senator Cory Booker (D), has advanced this effort in a big way, announcing two new bills promoting wireless communications.

To give credit where credit is due, the Senators’ recent moves are part of a key Administration goal that seeks to add 500 MHz of spectrum for mobile broadband use. The FCC is in the process of implementing congressionally mandated spectrum reallocations contained in 2012 legislation. But with the Administration’s more recent emphasis on commercial-government spectrum sharing, dark clouds are brewing over the attainability of this goal.

Senator Rubio’s package of legislation, however, with some bipartisan support, would serve as a swift kick in the government’s behind to make good on the Administration’s claimed policy goal.

The Wireless Innovation Act of 2014, S. 2473, mandates the reallocation to commercial wireless use at least 200 MHz of spectrum currently allocated for primary or exclusive government use.  At least 140 MHz of the spectrum must be licensed for exclusive commercial use, not more than 20 MHz would be for unlicensed use, and up to 40 MHz can be shared between government and non-government users if primarily allocated for commercial use and adequate sharing and non-interference protections are in place. The Act mandates auction deadlines, promotes government spectrum efficiency by encouraging use of commercial services, using updated technologies, and increases the transparency of government spectrum use and incentives to vacate spectrum.

The Wi-Fi Innovation Act, S. 2505, is co-sponsored by Senators Rubio and Booker, and would require co-allocation of the 5.8 GHz band, currently allocated for intelligent transportation services, to also include unlicensed wireless use. The co-allocation mandate is conditioned on FCC findings that dynamic sharing techniques are available so that the dual uses can coexist without harmful interference. The Act also requires a study to assess unlicensed spectrum use in low-income neighborhoods.

The spectrum Senator Rubio’s legislation would add for wireless use is unquestionably necessary. Cisco has recently estimated that global Internet use will triple over the next three years, with mobile broadband increasing 11-fold. The percent of Wi-Fi and mobile devices carrying Internet traffic will increase from 46 percent in 2013 to 61 percent by 2018. Mobile data traffic will reach 15.9 exabytes (one billion gigabytes) per month by 2018. Free State Foundation scholars have shown that the growth and substantial investment in broadband wireless networks in the United States far outstrips that of European counterparts.

The Rubio legislation seeks to enable the continuation of this American success story. The exclusive commercial wireless spectrum would add needed capacity for LTE systems. And, increasingly, Wi-Fi and its connection to high bandwidth wired connections will increase the flexibility of and accessibility to all broadband. The mobile nature of these advances is necessary to achieving the Internet of Things, transforming a multitude of ordinary devices into more intelligent and useful ones. By ensuring adequate spectrum capacity, investment incentives improve, helping to meet consumer demand and improve consumer welfare.

The proposed Wireless Innovation Act recognizes that government/non-government spectrum sharing is potentially inefficient and may undercut spectrum goals, as I have recognized in my recent FSF Perspectives. Senator Rubio would reassert the congressional preference for clearing and reallocating government spectrum, relying on sharing only where necessary to preserve essential public safety and national security spectrum uses. The Act laudably takes an initial step to improve government’s efficient use of spectrum by encouraging use of commercial spectrum, using efficient engineering technologies, and providing seed money in order to provide an incentive for government users to relinquish spectrum “beachfront property.”

Some potential disputes are arising, such as from the automotive industry that currently has exclusive allocation of the spectrum targeted for co-allocation in the Wi-Fi Innovation Act. The bill, however, relies on the FCC’s technical ability to resolve interference concerns, and speeds up this process, which has been very slow in the past. In addition, as to the Wi-Fi low-income study contained in the Wi-Fi Innovation Act, I must admit that I am not a fan of government-mandated studies. Such studies are often expensive, potentially burdensome to private enterprise, and frequently go nowhere.

I applaud Senators Rubio and Booker for attempting to advance the goal of more spectrum for mobile broadband use. This type of bipartisan Washington effort promises to improve consumer welfare by meeting consumer broadband demand, and achieving sustainable private economic growth that will add jobs and aid economic and social development.

Thursday, July 03, 2014

Independence Day 2014


What is the meaning of Independence Day for today? 
We know it’s about more than hot dogs, apple pie, and fireworks. 
But how much more? 
Well, we know it’s about celebrating, as a matter of historical reality, the adoption of the Declaration of Independence by the Second Continental Congress on July 4, 1776, and the American Revolution that won our independence. 
But what’s the deeper meaning of the Declaration of Independence and the American Revolution? 
Now, we’re getting down to brass bugles. 
At one level, of course, it’s not that complicated. The Declaration itself proclaims – on behalf of what it calls, in the first sentence, “one People” – the self-evident Truths, “that all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.” 
By the time the Constitution of 1787 was framed, the Declaration of Independence’s “one People” had become, in the Constitution’s very first three words, “We the People.” 
“We the People.” We Americans. 
But beyond the self-evident truths, what do the Declaration of Independence and the Revolution mean for America and the world today? Several months ago I read a new book, The Great Debate: Edmund Burke, Thomas Paine and the Birth of Right and Left, by Yuval Levin, editor of the journal National Affairs. I commend the book if you wish to learn a considerable amount about the lives and political philosophies of Paine and Burke. But for my purposes here, I want to focus just briefly on the different perspectives of these two political theorists regarding the meaning of American independence and our revolution. 
Even before the Declaration of July 4th, Thomas Paine, in his famous tract Common Sense, published in January 1776, wrote: “The cause of America is in great measure the cause of all mankind.” 
In this early view of American exceptionalism, Paine did not waver. In his Rights of Man, published in 1791 in direct response to Edmund Burke’s Reflections on the Revolution in France (1790), Paine declared: “The independence of America, considered merely as a separation from England, would have been a matter but of little importance, had it not been accompanied by a revolution in the principles and practice of governments.” 
Paine always considered America’s fight for independence, its revolution, to be a fight about fundamental, yet abstract, principles – equality and liberty – about which, in the nature of government and politics, there should be no compromise, no middle ground. 
Like Paine, Burke supported the colonies’ quest for independence. Indeed, from his seat in Parliament, he did so eloquently, in the midst of the fevered politics of the moment. But his understanding of the causes of the American Revolution, and its ultimate meaning, was much different than Paine’s. Burke maintained that England simply pushed the colonists too far, not taking into account the particular needs and circumstances of the colonists as they had developed over time in the New World. In his view, the separation could have been avoided by practical adjustments addressing the colonists’ grievances. 
Thus, Burke had little use for the abstract ideals that Paine proclaimed as universal truths applicable to all of mankind. He said in the House of Commons that America should have been governed “not according to abstract ideals of right; by no means according to mere general theories of government.…” For Burke, taking due account of the actual customs, habits, and obligations that shape a particular society is more important in establishing and maintaining a consensual, workable government than unbridled devotion to a theory of rights. In other words, a political theory like that espoused by Paine. 
With whom do you identify more closely when you think about the meaning of the Declaration of Independence and the ongoing American experiment – Thomas Paine or Edmund Burke? 
This at least is food for thought on Independence Day, while we go about enjoying the hot dogs and apple pie. 
As for Thomas Jefferson, the Declaration’s lead draftsman, his views were always more closely aligned with those of his friend, Tom Paine. In his September 1821 letter to John Adams, Jefferson wrote: "And even should the cloud of barbarism and despotism again obscure the science and liberties of Europe, this country remains to preserve and restore light and liberty to them. In short, the flames kindled on the 4th of July 1776, have spread over too much of the globe to be extinguished by the feeble engines of despotism." 
There surely remains much despotism around the world, and much cruel deprivation of liberty and basic human rights. And I suppose there will be for a long time to come. But, for myself, I still pay homage to the flames kindled on July 4th, 1776, and I still hold that the cause of America – the ideals that the Declaration rightly proclaims as self-evident Truths – is, in large measure, the cause of all mankind. 

PS – My previous Independence Day messages are here: 2007, 2008, 2009, 2010, 2011, 2012, and 2013.

Friday, June 27, 2014

Senator Thune, Commissioner Pai Advocate Telecom Reform

I am grateful that Senator John Thune, Ranking Member of the Senate Committee on Commerce, Science, and Transportation, and FCC Commissioner Ajit Pai spoke at the Free State Foundation’s June 25 seminar, “Reforming Communications Policy in the Digital Age: The Path Forward.” And because it is such a pivotal time for communications policymaking, I am especially grateful that each used the occasion to deliver such important, substantive addresses.

Among those engaged in the debate, there are divergent views concerning the path forward for proper communications policy – in essence, one view embodies a pro-regulatory vision and the other a free market-oriented one. At the Free State Foundation, we work hard, based on our research and analysis, to articulate, on a principled basis, the case for the less regulatory, free market-oriented vision.

Senator Thune’s and Commissioner Pai’s Free State Foundation addresses constitute important contributions to the ongoing discussion concerning reform of our nation’s communications laws and policies. I urge you to review the full texts of their speeches here and here. But, in the meantime, please do take a few minutes to read the excerpts immediately below.

SENATOR JOHN THUNE - EXCERPTS

While some pro-regulatory advocates claim our communications sector is dominated by monopolies and duopolies, the evidence in the marketplace doesn’t support that view.  Monopoly markets are typically characterized by a lack of investment, a lack of innovation, no new entrants, and excessive profits. 

Since 1996, the private sector has invested $1.2 trillion into building and constantly upgrading our nation’s communications networks, including about $60 billion annually in capital investments over the last few years.  Regarding market entry, we have already seen rampant intermodal competition in the telephone and video markets.  Not to mention efforts by companies like Google and DISH Network who are committed to becoming serious new broadband players.

As for excessive profits for communications providers, again, there’s little evidence.  Former Clinton Administration Official, Everett Ehrlich, found that Fortune 500 broadband companies had an average profit margin of just 3.7 percent.  The average profit margin for Fortune 500 Internet companies who offer services on top of the broadband infrastructure?  A whopping 24 percent.  As Ehrlich points out, “this sizeable difference makes clear that providers of broadband connectivity are not extracting undue profits from broadband users.” 

Why does this all matter?  Because painting a picture of a dysfunctional communications and broadband marketplace is central to the efforts of pro-regulatory advocates who claim more government intervention into the online world is needed to fix a “broken system.”  Many of those who seek to regulate the Internet are using mistruths and hyperbole to scare both the public and policymakers into restricting economic and individual liberty. 

*  *  *

The last time Congress significantly updated our communications laws was in 1996.  Back then, you had to pay for the Internet by the hour, and going online meant tying up your home’s telephone line.  There were only 100 thousand websites in 1996, and Google and Wikipedia had not been created yet.  Today there are nearly 900 million websites.

The bipartisan and deregulatory Telecommunications Act of 1996 encouraged intermodal competition and provided a light regulatory touch for information services.  Bipartisan leadership at the FCC reinforced the light touch for the Internet when implementing the law.  All of this fostered an era of convergence and innovation in the communications space.  Cable companies started to compete with telcos, telcos got into the cable TV business, and everyone started offering Internet access. 

The Telecom Act was far from perfect, but it got the job done.  Even so, it is best to view the Telecom Act as a transitional law for a transitional time, rather than as a permanent statute that will last 62 years without major revision, like its predecessor, the Communications Act of 1934.  The original Communications Act was designed for an era of actual communications monopolies; the Telecom Act was designed for the transitional era that took us from monopoly to competition; and now, we need a new policy framework for today’s converged, competitive, and Internet-powered world.

This, of course, is much easier said than done.  Modernizing the laws governing the communications and technology sectors is no small task, which is why I am glad my colleagues in the House of Representatives have already begun examining the regulation of the communications industry. 


*  *  *

Now, I’m not saying that the Internet should be a lawless frontier free from any government oversight.  That is the sort of straw-man accusation leveled by those who want to avoid doing the hard work of justifying regulations for the Internet ecosystem.  Even so, policymakers must be careful to preserve the light-touch regime, first implemented by the Clinton Administration, that has been so successful in making us the digital envy of the world. 

Some people, however, want to completely upset that regime and instead want to see the Internet shackled with Title II of the Communications Act.  Title II is certainly not a “light touch,” not with its burdensome rate regulation, property valuation, and discontinuance provisions, along with many others. 

Traditional wireline telephony now makes up just 22 percent of the 443 million phone lines in America, and that rate continues to decline each year.  When consumers are rapidly abandoning traditional Title II services, it makes little sense to apply Title II regulations to today’s new technologies and business models.  Even Google seems keen on avoiding the morass of Title II—the Internet giant has specifically chosen not to offer telephone services with its Google Fiber broadband product because it wants to avoid the regulatory burdens that come along with it. 

Another reason I oppose Title II reclassification is because regulating an industry as if it were a public utility monopoly is the surest way to guarantee the industry will become a monopoly.  As I discussed earlier, the evidence in the marketplace makes it clear that our broadband market is dynamic and competitive—not at all like the early days of Ma Bell that Title II was intended for.  Public utility regulation traditionally is intended to do two things—protect the public from the harms of a monopoly, while simultaneously protecting that monopoly.  Since the broadband market is demonstrably not a monopoly, regulating it as a public utility would only make the industry less competitive and less innovative.  Or, in other words, make it more like a monopoly.


COMMISSIONER AJIT PAI - EXCERPTS

I don’t mean to suggest that our nation’s broadband policy has been perfect. It hasn’t. There’s certainly more we should be doing to clear out the regulatory underbrush that deters infrastructure investment and broadband deployment. But when it comes to our fundamental choice of a regulatory model, the United States has gotten it right.

Of course, there are those who disagree, and their voices have become louder of late. Many are now claiming that the only way to protect the Internet from ruin is to reclassify broadband as a Title II service. In other words, they want to end the minimal regulatory environment for broadband and replace it with rules based on 19th century railroad regulation.

This makes no sense. The common-carriage rules of Title II were designed to control one company that had a monopoly on long-distance telephone service, not the 1,712 companies that now compete to provide broadband service to the American consumer.

And beyond the sloganeering, there are any number of complicated questions to which I have yet to hear an answer. How much would consumers’ broadband prices go up to pay for the universal service charges all carriers must contribute? Why should we apply anti-consumer rules like tariffing to the broadband world? How would the Part 36 separations process apply to apportion the various components of the network between the several states and the FCC for regulatory purposes? And why should we open the door to actual access charges, imposed on edge providers, content delivery networks, and transit operators without their consent?
*  *  *

This means that uncertainty will hang over the marketplace for a long time. How many years would it take us to decide which parts of Title II merit forbearance? How many provisions must we even examine? When we still haven’t collected data in the special access proceeding, about a year-and-a-half after authorizing that collection, how could we possibly expect to timely gather data to handle the wider broadband market? And in a rapidly changing industry, how enduring would a particular FCC snapshot of the marketplace, upon which critical investment decisions would rely, really be?

But aside from the mechanics of implementing Title II, we need to ask a more basic question. Where would Title II regulation lead? One good indication is to compare the results produced by the American regulatory model to those of a more intrusive regulatory model: Europe’s. Rather than taking a light-touch regulatory approach to broadband, the European model treats broadband as a public utility, imposes telephone-style regulation, and purports to focus on promoting service-based (rather than facilities-based) competition.

The results of the public-utility model speak for themselves. Eighty-two percent of Americans (and 48 percent of rural Americans) have access to 25 Mbps broadband speeds. In Europe, those figures are only 54 percent and 12 percent, respectively. And these figures aren’t skewed by less developed countries; in France, the figures are 24 percent and 1 percent, respectively. Similarly, American broadband companies are investing more than twice as much as their European counterparts ($562 per household v. $244), and deploying fiber-to-the-premises about twice as often (23 percent v. 12 percent). Small wonder, then, that the European Commission itself has said that “Europe is losing the global race to build fast fixed broadband connections.”


*  *  *
NOTE: There also was an excellent panel discussion at the event with John Bergmayer, Public Knowledge; Scott Cleland, Precursor LLC; and Adam Thierer, Mercatus Center at George Mason University. A transcript of that session will be published in due course.